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[T569]The Limited Liability Company

by Gerard Simington, Ger

Understanding the Magnificent Limited Liability Company

There are two primary ways something becomes law. The first is for a legislative body to pass an act that creates or regulates some action by individuals or businesses. The second occurs when a court looks at the actions of the legislative branches and modifies or clarifies the acts pursuant to constitutional issues. In the case of the limited liability company, the act was pure legislative genius.

In 1977, the legislature for the State of Wyoming took a novel step. For the first time in a very long while, it created a new business entity. The goal was to create a business entity for small businesses that provided the protection of a corporation without much for the record keeping. Up to that time, there really wasn't any such beast. As an aside, this new entity would bring in needed revenues in the form of filing fees to Wyoming, but it was a small price to pay for most small business. With the signature of the then governor, the limited liability company came into existence.

Given the current number of LLCs you see, one might think the entity was an immediate hit with small businesses. It was not. There were two reasons. First, only small businesses in Wyoming could use it since no other state had passed a law allowing for their use in the other 49 states. Moreover, the IRS could not figure out how to treat the business entity for tax purposes. Under Wyoming law, the entity was supposed to provide the shield from liability of a corporation, but be taxed as a partnership. In 1988, the IRS finally issued a quasi-guideline indicating that the entity would be taxed as a partnership if so elected by the owner and the LLC gained new popularity. Thereafter, states started enacting legislation for their own LLCs at a mad rate and the business came to be.

The primary benefits of an LLC are two fold. As mentioned previously, the business provides a shield between business debts and a member's personal assets. In an LLC, a shareholder is known as a member. The second benefit is the LLC is taxed like a partnership, which means it is a fairly simple filing wherein the finances of the business are passed through to the personal tax returns of the individual members relative to their percentage of ownership. In legal terms, the entity was very attractive.

As things have moved forward, the LLC has proven to be a useful and popular tool for most small businesses. For once, a legislative body passed a law that seems to have had no negative repercussions!

An LLC or limited liability company is a form of business registration that allows the owners of a business to protect themselves from some of the liabilities of being in business and at the same time receive some of the tax benefits of other more elaborate business registrations like an incorporation or partnership. In order to register a business as an LLC or limited liability company the business has to prepare articles of organization and file them with the state in which they wish to register their business.

There are some fees applicable to registering a business as an LLC similar to registering a corporation. An added benefit is that you don't necessarily need a lawyer to register a business as an LLC and this is especially useful for small businesses where both time and cash is at a premium. You can choose to get advice from a lawyer or an accountant about the choice of registering a business as a limited liability company but it is not required by law.

As noted above some of the benefits of registering a business as an LLC include tax advantages and limited liability. In addition limited liability companies have much more flexibility when developing a management and ownership structure and the reporting requirements are far less under this form of business registration.

The tax benefits of an LLC business registration are mostly gained through what is called pass-through taxation. This means that the profits from the business are only taxed once and owners do not have to pay both corporate and personal income tax on any monies earned through the business.

The limited liability under an LLC makes a provision that limits the liability of owners and operators to the amount of money that they have invested in the firm. Any debts or responsibilities above those amounts are the liability of the corporate entity and not the ownership group.

Having the flexibility to develop their own management structure and ownership system is also a great advantage for a limited liability company versus incorporation. Under a corporate business registration regime the laws specify the number of officers and the responsibilities of Board of Directors to report to shareholders. This makes it difficult to separate the operation of the business from the desire to earn a maximum profit.

Finally the last advantage of having an LLC business registration is that it is much simpler to operate under than other formal forms of registration. There are minimal requirements for reporting to state and other regulatory bodies and unless a company desires to have one there is no requirement for a Board of Directors or an Annual General Meeting to approve management's handling of the business, although we recommend that you do so anyway.

All of these factors make a limited liability company or LLC an attractive business registration option for many small and medium sized businesses.

Article Source : Benefits And Disadvantages Of A Limited Liability Company

About Author

Both Gerard Simington & David Gass are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Gerard Simington has sinced written about articles on various topics from Setting Up Company, Legal Matters and Legal Matters. . Gerard Simington's top article generates over 1900 views. to your Favourites.

David Gass has sinced written about articles on various topics from Accounting Guide, Finances and Network Marketing. David Gass is President of Business Credit Services, Inc. His company publishes a on Small Business Consulting at their web site. David Gass's top article generates over 246000 views. to your Favourites.